American companies have just delivered one of the strongest earnings seasons in recent years, but the U.S. stock market has not danced along, showing a significant decoupling between strong earnings performance and sluggish market trends.
According to Bloomberg, the earnings of S&amp;P 500 constituent companies grew by 13% in the fourth quarter, nearly 6 percentage points higher than expected. However, during the six-week period starting with the earnings reports from JP Morgan and Walmart, the S&amp;P 500 index fell by 1.7%, matching the worst performance during the earnings season over the past 10 quarters.
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&#34;Panic trading&#34; triggered by artificial intelligence, global geopolitical risks, and concerns about private credit have collectively suppressed market optimism. Investors are rapidly repricing sectors that are vulnerable to the impact of AI technology, leading to a flow of market funds from overvalued sectors to safer assets.
Despite the multiple uncertainties leading to a sideways and volatile trend in U.S. stocks in the short term, market participants still believe that the resilience of corporate fundamentals will ultimately dictate the market direction. Once investors clarify the scope and pace of AI's disruptive impact, U.S. stocks are expected to regain upward momentum.
<h2>Strong Performance Meets Market Indifference</h2>
The earnings fundamentals of U.S. companies in the fourth quarter are extremely robust. According to Bloomberg, citing data from Jefferies Financial Group Inc., not only did earnings growth exceed expectations, but companies are also optimistic about their earnings outlook for the coming year. In the Russell 3000 index, the ratio of companies raising earnings guidance to those lowering it reached 4 to 1, the last time this ratio appeared was after the recession or following the 2018 tax reform.
However, the impressive data has not translated into upward momentum in the stock market. Part of the reason for this phenomenon is the high position of the stock market at the start of the earnings season. Driven by the AI boom and robust consumer spending expectations, U.S. stocks were previously at historical highs.
Michael Bailey, research director at Fulton Breakefield Broenniman, pointed out that the market may have entered an era of &#34;buy the expectation, sell the fact.&#34; Over the past three years, the bull market in AI and large tech stocks has pushed investor expectations to a frenzied peak. This means that now delivering &#34;better than expected and raising guidance&#34; earnings reports are merely basic chips on the table, no longer sufficient to warrant a market celebration.
<h2>AI &#34;Panic Trading&#34; and Multiple Risks Overlapping</h2>
A more severe challenge comes from the recent uncertainties that have disrupted investors' perspectives. According to Bloomberg, the once one-sided AI trading has now evolved into a re-evaluation of winners and losers, recently further transforming into so-called &#34;panic trading&#34;—the market has begun to rapidly reprice those industries deemed vulnerable to the impact of AI technology.
This Monday, concerns about the disruptive nature of AI erupted completely. A report from an organization called Citrini Research, coupled with warnings from Nassim Taleb, triggered a market sell-off. International Business Machines became a victim of this sell-off, recording its largest single-day drop in over 25 years.
In addition to the valuation pressure brought by AI, geopolitical and macroeconomic risks have also prompted investors to turn to safe havens. The potential impact of a U.S. invasion of Iran on the global energy market has raised widespread concerns in the market. At the same time, the difficulties faced by Blue Owl Capital have also raised doubts about private credit companies. Moreover, the U.S. Supreme Court's overturning of Trump's global tariff policy initially sparked market cheers, but the news of his promise to implement new import taxes quickly dampened market optimism.
<h2>Fundamentals Still Expected to Dominate Future Markets</h2>
Amid multiple intertwined risks, the S&amp;P 500 index has recently entered a &#34;sideways&#34; state. Sameer Samana, head of global equities and real assets at Wells Fargo Investment Institute, stated that despite solid performance, the uncertainties surrounding AI and private credit have weakened investors' willingness to pay valuation multiples for sectors such as software and fintech. While sectors like industrials and energy have received valuation boosts due to higher certainty, their weight is insufficient to drive the overall market.
Tom Hancock from GMO added that investors are worried about the future impact of AI, whether it be capital expenditures from mega-cap tech companies or potential disruptions to software companies. Since these concerns have not yet been reflected in this quarter's performance, it has led to a decoupling of stock returns from current fundamentals.
Nevertheless, the market still maintains long-term confidence in the fundamentals of U.S. companies. Samana pointed out that investors need time to assess the scope and pace of AI disruption, but he believes the economy remains robust, and the market is still expected to reach new highs in the future.
Bailey also holds an optimistic view. He stated that if companies can achieve the hot consensus growth expectations for 2026 and market sentiment remains stable, U.S. stocks may witness another remarkable performance, with the S&amp;P 500 index expected to achieve a 10% to 15% increase this year

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U.S. companies delivered their strongest earnings report in recent years: Q4 earnings grew by 13%, exceeding expectations by nearly 6 percentage points. However, the S&P 500 fell by 1.7% during the earnings season, matching its worst performance in a decade, with strong results significantly decoupled from the sluggish trend. The main reason for the decoupling is the "panic trading" related to AI, geopolitical concerns, and worries about private credit suppressing the market. Investors are rapidly repricing industries vulnerable to AI impacts, leading to capital flowing out of overvalued sectors

- U.S. companies reported their strongest earnings season in years, with S&P 500 companies' Q4 profits up 13%, yet the index fell 1.7% during this period.  
- Market apprehension stems from AI-induced "panic trading," geopolitical risks, and concerns over private credit, prompting a shift from high-valuation sectors to safer assets.  
- Despite current market volatility, confidence in corporate fundamentals is expected to lead to a potential resurgence in U.S. stocks, with forecasts suggesting a 10%-15% increase for the S&P 500 in 2026.

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Strong earnings can't save the market? U.S. companies deliver the strongest report card, but the S&P 500 has dropped 1.7% in six weeks